Managing Your Portfolio In Wartime

In the two weeks preceding the war, the stock market took a nosedive and then turned around to hit some big gains.

For instance: The S&P 500 gained almost 30 points on Monday the 17th - 7.6 percent - once investors became confident the war was going to begin.

It slowly gained a total of over 62 points for the week, closing at 895.79 on Friday, as bombing began and it looked as though an easy victory was assured.

Then, on Monday the 24th the S&P lost 3.6 percent of its value, falling over 31 points due to the grim television footage that began to appear over the weekend and Monday's pictures of American POWs that were broadcast across the country.

The index bounced up over 10 points on Tuesday following news that Iraqi citizens in Basra were rising up against Saddam Hussein.

Financial Adviser Ray Martin says since the war began the market has been up and down, up and down based on what's happening in Iraq - literally a barometer of how investors feel the war is progressing.

Although the stock market is never a sure bet, activity over the past two weeks indicates that it's a particularly unstable investment right now. And even at war's end, Martin says he doesn't foresee a big improvement in the overall economy. While our economy will recover some after a war with Iraq, it will not grow as it did after the Gulf War.

"Don't expect a rebound or a large gain," Martin says. "It will be more likely that one day the market's up 400, the next day it's down 300."

Why won't 2003 look like 1991? Because in '91 the economy was not coming off a big stock market bubble, Martin says, nor had it suffered from rampant accounting fraud. Equally important, the nation had not suffered terrorist attacks like Sept. 11. All of these things promise to keep the economy somewhat suppressed.

Investors, frustrated with the returns and losses they've suffered, have been turning away from the stock market in droves. Looking for a place to stash their cash, they're turning to money markets. As a matter of fact, the amount of money in money market accounts is reaching an all-time high, busting past the $2 trillion mark for the first time ever.

Money Fund Report's weekly survey of 1,590 taxable and tax-free funds for the week ending March 20 found that the total now exceeds $2.3 trillion - and that doesn't include the total in bank deposits, CDs and savings bonds.

With interest rates at one percent or less, these accounts are clearly not going to be big money earners. They are not even keeping up with inflation, especially after you factor in that this one percent interest is taxable! On the other hand, investors figure, at least they won't be losing money. There's nothing wrong with this reasoning, Martin says, but there is a better option.

Cautious investors who simply can't tolerate any more loss can follow a different investment strategy that's still conservative but likely to earn closer to 3 to 4.5 percent. Martin recommends the following portfolio distribution to investors who:

What is a stable value fund? Basically a mutual fund that invests in low-risk vehicles such as insurance company or bank investment contracts or bank short-term investment funds, cash, and cash equivalents. These funds are not a place to park money for safekeeping and then bail when the markets look healthier. You will pay a fee (two to four percent) if you withdraw before a designated time - usually about two years. This is the perfect option for people who know they will want to use the money in the next three to five years, cannot afford any loss and want to earn more than a money market fund.

Why short term bonds?"Bond values go up when interest rates go down," Martin explains. "Bonds have seen an incredible run over the past three years while interest rates have fallen to 45 year lows. However, rates are ready to rise as the war ends, bonds will then be far less desirable. Short-term bonds are less affected than longer-term bonds because they mature and return your money sooner - money you can then use to buy new bonds at higher yields.

"Finally, investors who are continuing save and invest for long term goals should continue to allocate their contributions mostly to longer term investments, which means buying stocks and diversified stock funds. Now is the time to buy stocks at lower prices, particularly when prices are beaten down by uncertainty and fear. In 20 years, these prices will look like a bargain, as long as you live that long to tell about it," he says.